Earthquake disasters affect many structures and infrastructure simultaneously
and collectively, and cause tremendous tangible and intangible loss. In particular, catastrophic
earthquakes impose tremendous financial stress on insurers who underwrite earthquake insurance
policies in a seismic region, resulting in possible insolvency. This study develops a
stochastic net worth model of an insurer undertaking both ordinary risk and catastrophic
earthquake risk, and evaluates its solvency and operability under catastrophic seismic risk.
The ordinary risk is represented by a geometric Brownian motion process, whereas the
catastrophic earthquake risk is characterized by an earthquake-engineering-based seismic
loss model. The developed model is applied to hypothetical 4000 wood-frame houses in
south-western British Columbia, Canada, to investigate the impact of key insurance portfolio
parameters to insurer’s ruin probability and business operability. The analysis results
indicate: (i) the physical effects of spatially correlated ground motions and local soil conditions
at insured properties are significant; (ii) the insurer’s earthquake risk exposure depends
greatly on insurance arrangement (e.g. deductible and cap); and (iii) themaintenance of sufficient
initial surplus is critical in keeping insurer’s insolvency potential reasonably low, while
volatility of non-catastrophic risk is the key for insurer’s business stability. The results highlight
the importance of adequate balance between business stability under normal conditions
and solvency under extreme conditions for efficient earthquake risk management. Flexibility
for determining an insurance arrangement would be beneficial for insurers to enhance their
portfolio performance and to offer more affordable coverage to their clients.

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